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Month: February 2012

I’ve never liked top-down economic planning, and after reading Brink Lindsey’s Against The Dead Hand, I know why. Plus, it really changed my perspective of free markets and socialism, especially how the death of liberalism came about in the late 19th century.

Apparently, top-down just seemed logical, given their experiences with large corporations; a single big one could organize the resources for a market better than five smaller. A central economic planning body was preferred to competitive interactions between smaller actors in separate fields. The term “progressive” came about as a result of this ostensible idea that that’s where the world’s heading. Of course, our understanding of it all then was limited and ill-founded – and we’d all pay for it later.

I was reminded of James Surowiecki’s The Wisdom of Crowds, showing how localized decisions aggregated into a broader network yielded better results than top-down. How? According to this social organizing principle, the group itself acts smarter than even the brightest of its members – providing all have access to different information, are making independent decisions, and aren’t influencing each other. It’s not a new phenomenon, first observed by Francis Galton in a county-fair game guessing an ox’s weight over a century ago. The majority missed it while the average of the group’s responses were within 1% of it.

The most noted has to be the wreck of the USS Scorpion – a submarine that went down with all hands in May ’68, the Navy only having its last reported location days before. To help pinpoint the wreckage, a panel was assembled of diverse talent: mathematicians, salvage experts and sub tacticians – each given all available information to best estimate the location. Using Bayes Theorem, a collective determination was calculated; while its discovery proved none had correctly located it individually, the “group guess” was within 220 yards of it exactly.

So, if the broader network is smarter decision-making, why didn’t top-down planning go the way of the dodo when it proved inferior? Okay, let’s do a quick recap on the history of socialism.

It first assumes the marketplace naturally chaotic, which jives with why top-down planning was a local choice to combat it; observers claimed entire industries become consolidated in the hands of a few individuals. Second, it was born during the Industrial Revolution – a really crazy time – with its pioneer, Karl Marx, believing the whole thing a one-off process: the world needed to transition from an agrarian society to an industrialized one. In Das Kapital, he argued all industries would eventually find themselves controlled by only a handful of wealthy leaders, at which point, the process was complete. He seemed hopeful society would lose its dynamism, returning to a more tranquil time, and leaving these industrialists in possession of “the means of production” of the greater society was an injustice.

Of course, history has an ironic sense of humor. In time, Marxist revolutionaries would go on to do just that, as industrialization was proven not a one-off process after all.

Innovation constantly brought a new stream of products and services to market, and a society run by top-down committee (see: the former Soviet Union) just couldn’t effectively allocate resources to produce what the public actually wanted. And, like we know of any bloated bureaucracy, it collapsed beneath the weight of its own inefficiency.

What’s consistently proven to get the job done? Well, for resource-allocation, the free market is tops. If an oil embargo suddenly restricts its nation’s access, we hardly need an army of bureaucrats to refigure society’s production flow. As a commodity’s price rises, people naturally seek less expensive alternatives or use less of it. The free market allows for a resource to be restricted to those who use it best to benefit society; downright unthinkable to the “progressives” of yesteryear. And it’s that free market mindset which allows the “wisdom of crowds” to do its thing.

Oddly enough, socialism has been almost entirely refuted, and yet, it’s still around. We can only hope, like other “great” ideas – flat earth, phrenology, and stagflation – it’ll find its way to the dustbin of history as people become better educated.